K-1 Where Qualified Dividends Greater than Ordinary Dividends

[MZ229]

I have a K-1 from an MLP where the Qualified Dividends on the K-1 exceed the Ordinary Dividends by $2.

This doesn't seem correct to me (and TT is flagging it that it shouldn't be more than the Ordinary Dividends).   It was always my understanding that Ordinary Dividends were supposed to include all Dividends earned and then Qualified Dividends just get subtracted from that to handle the difference in taxation. 

I asked assistance from the MLP agent that sends the K-1 and this is what I received:

It is not necessary for Qualified Dividends(6b) to be always less or equal to Ordinary Income(6a). As it differs from partner to partner and its based off the length of time the units are held. Regarding the error you are receiving in turbo tax, please contact turbo tax support for assistance.

Does this sound correct?  Will it cause my return to be rejected/cause other issues?

Thanks!

[nexchap]

I've never seen it or read about it as a possibility, and TT definitely thinks its an error, but that's not proof that the agent is wrong.  Hopefully an expert in this area of taxation will be able to point to something definitive.  But if you want to pursue it with the Partnership, I'd suggest a couple avenues: 

1. Contact a different agent at the K-1 preparer to see if you can get a better explanation (especially since the one you talked to referred to 6a as ordinary income, rather than ordinary dividends) -- there are many new people being trained during this period, so someone with more experience might get you a better explanation.
2. Ask them to look specifically for any notes for your partnership about lines 6a/b.  Usually, when something odd is going out in the K-1 there may be notes for the agents to help them answer the inevitable inquiries.  You won't be the only unit holder contacting them about this
3. Try contacting investor relations for the partnership in question (their email will be on their website).  They may be able to direct you to someone who can provide a better answer.

All of that may be more effort than you want to spend on a $2 issue.  Given that this is such a small impact on taxes, if you just want to file, but without any TT warnings, you can always just increase line 6a by $2. 

[MZ229]

Thanks for the reply.  When I spoke to support at Intuit they suggested a similar option (but it was my decision).  In the end, changing the numbers did not make any difference to tax due/refunded. In other words, there was no material impact.

Prior to your reply, I did contact the K-1 provider again and received a curt reply from the same support person that they don't provide tax advice.  To me it seemed that they didn't appreciate having their numbers challenged. 

I did find this information during my research and included this in my follow up e-mail to them and highlighted the phrase about qualified dividends:

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According to the IRS 1065 Instructions for Line 6a:

Line 6a. Ordinary Dividends Enter only taxable ordinary dividends on line 6a, including any qualified dividends reported on line 6b. Do not include any dividend equivalents reported on line 6c. Schedule K-1. Enter each partner's distributive share of ordinary dividends in box 6a of Schedule K-1.

So, my thinking is that if line 6a on the overall 1065 form must include anything reported on line 6b, then line 6a must always be greater than line 6b. Then when the allocation is made based on partner percentage, then some part of the total is allocated to the partner. Even if there is a moving day-to-day allocation based on the partners’ unit allocations and the partnership earns a dividend on that day, that dividend is either qualified or not and some percentage of that dividend is allocated to the partners based on their ownership percentages at that time. Still, the total of that dividend on that date should be added to Ordinary Dividends and if it is Qualified then it should be added to the Qualified Dividends too. I am just not following the mathematical logic here.

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Perhaps there is some really odd logic in this case, but based on the definition in the K-1 instructions, something seems incorrect. 

In any case, thanks again for the advice.  It turned out to be the most logical course of action for me.  It wasn't worth the effort to attempt to find a different agent especially since it didn't make a material impact. 

[AmyC]

Yes, qualified dividends are derived from ordinary dividends. Which, as your math implies, means that qualified dividends would be less than or equal to ordinary dividends. Since your qualified dividends did not change, changing your ordinary to match the qualified was of no consequence.